Sunday Strategist: Coronavirus Hits the Global Supply Chain

(Bloomberg Businessweek) -- We already know the nastiness the coronavirus wreaks on a body; we’re about to find out how much damage it does to the global economy. 

We get a hard lesson in supply-chain disruption every once in awhile with the odd earthquake, factory fire or port strike. (The launch of Boeing’s 787 Dreamliner was particularly instructive). But the coronavirus is a different scale of shock. By most accounts, the carnage will be substantial and indiscriminate—laying low giants like Apple and mom-and-pop trinket shops in turn. The disease may be particularly brutal for Amazon, which relies heavily on products from third-party merchants.

I suspect the crop of direct-to-consumer darlings that carpet-bomb Instagram with everything from skinny sweatpants to smart toothbrushes, have the weakest immune systems of all. In a drop-ship world, many of those startups never touch their product, let alone store a few thousand units for a rainy day.

This is the dark underbelly of lean inventory. And it's why supply-chain managers make the big bucks—or at least the medium bucks. They are the linemen of contemporary commerce; the uncelebrated specialists who are often the difference between a company making or missing a quarter. There’s efficiency and there’s resiliency and it’s hard to make the relationship between the two anything but inverse.

The real alpha these days isn’t so much keeping in inventory skinny as it is making sure it’s elastic—meaning it can be scaled up and down quickly depending on demand. Wal-Mart is apparently great at this, but those dark arts are largely moot when workers can’t leave their homes and cargo planes aren’t taking off.

At the end of the day, things will get back on track, albeit after some grim accounting. When U.S. retailers are trying once again to figure out how much product to have on hand for Black Friday, supply chains may not look so different. Companies may chalk coronavirus up to fat-tail risk and opt not to invoke any of the best practices for weathering a global health epidemic—namely spreading work among different suppliers and siloing supply chains for separate products and separate regions.

But the smartest supply-chain managers will at least be tweaking their models and adding another variable to their algorithms. The weather isn't getting any less extreme and nasty respiratory viruses are only getting cagier. Lean inventory is still a great investment, but the reward, as they say, is not without risk.

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To contact the editor responsible for this story: Silvia Killingsworth at skillingswo2@bloomberg.net

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